Introductory description

The module is designed to help students gain an in-depth understanding of banks and financial institutions.

Module web page

Module aims

Outline syllabus

This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.

The module studies banks from the following perspectives.
To begin with, it studies banks as stand-alone entities that are created by unique financial contracts, such as collateralized loan contracts and demandable deposit contracts, with insights on banks' high leverage as compared to non-financial firms.
The module also examines banks from the inside, in terms of their internal contracting and organizational structures, for example, to under bankers' compensation contracts and the scope of banks.
The module then examines banks in the markets where they operate, such as loan markets and wholesale funding markets.
Finally, the module examines banks and their roles in the macroeconomy, such as how credit cycles can amplify business cycles and banks' role in the credit channel of monetary policy.

Learning outcomes

By the end of the module, students should be able to:

• Demonstrate understanding of the uniqueness of prevalent contracts in banking as well as banks' high leverage as compared to non-financial firms.
• Demonstrate understanding of the internal contracting in modern banking and banks' organizational structures.
• Demonstrate understanding of the working of credit markets as well as banks' wholesale funding markets.
• Demonstrate understanding of how credit cycles can amplify business cycles and banks' role in the credit channel of monetary policy.
• Apply agency theory in the context of banking to analyze issues such as bankers' compensation.
• Apply theories from information economics to analyze the design of loan contracts and credit market competition.
• Apply concepts such as risk-sharing to understand issues like interbank lending and the design of demandable deposit contracts
• Apply concepts such as risk-sharing to understand issues like interbank lending and the design of demandable deposit contracts

Indicative reading list

Selected chapters and sections from
Allen, Franklin, and Douglas Gale. Understanding Financial Crises. Oxford University Press, USA, 2009.

Freixas, Xavier, and Jean-Charles Rochet. Microeconomics of Banking. 2nd ed. Cambridge Mass.: MIT Press, 2008.

Greenbaum, Stuart I., Anjan V. Thakor, and Arnoud W. A. Boot. Contemporary Financial Intermediation, 4th edition. Academic Press, 2019.

Holmström, Bengt, and Jean Tirole. Inside and Outside Liquidity. The MIT Press, 2011.

Keiding, Hans. Economics of Banking. Red Globe Press, 2016.

Tirole, Jean. The Theory of Corporate Finance. Princeton University Press, 2006.

Example academic papers
Admati, Anat R., Peter M. Demarzo, Martin F. Hellwig, and Paul Pfleiderer. ‘The Leverage Ratchet Effect: Leverage Ratchet Effect’. The Journal of Finance 73, no. 1 (February 2018): 145–98. https://doi.org/10.1111/jofi.12588.

Cheng, Ing-Haw, Sahil Raina, and Wei Xiong. ‘Wall Street and the Housing Bubble’. American Economic Review 104, no. 9 (1 September 2014): 2797–2829. https://doi.org/10.1257/aer.104.9.2797.

Heider, Florian, Marie Hoerova, and Cornelia Holthausen. ‘Liquidity Hoarding and Interbank Market Rates: The Role of Counterparty Risk’. Journal of Financial Economics 118, no. 2 (November 2015): 336–54. https://doi.org/10.1016/j.jfineco.2015.07.002.

Ippolito, Filippo, José-Luis Peydró, Andrea Polo, and Enrico Sette. ‘Double Bank Runs and Liquidity Risk Management’. Journal of Financial Economics 122, no. 1 (October 2016): 135–54. https://doi.org/10.1016/j.jfineco.2015.11.004.

Jiménez, Gabriel, Steven Ongena, José-Luis Peydró, and Jesús Saurina. ‘Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk-Taking?’ Econometrica 82, no. 2 (1 March 2014): 463–505. https://doi.org/10.3982/ECTA10104.

Thanassoulis, John. ‘The Case for Intervening in Bankers’ Pay’. The Journal of Finance 67, no. 3 (2012): 849–95. https://doi.org/10.1111/j.1540-6261.2012.01736.x.

Subject specific skills

Analyze the incentive implications of compensation contracts within banks.
Analyze credit market competition under asymmetric information.
Analyze the banking sector's impact on the macroeconomy
Use the framework of modern finance theory to analyze issues in banking.

Transferable skills

Written communication